Why Drawdown Funds Are Better Suited for Qualified Purchasers Than Evergreen and Interval Funds

Written by: Steven Brod | Crystal Capital Partners

When discussing private investment vehicles, the choice of fund structure often depends on the investor's qualifications, financial goals, and risk appetite. Among the myriad structures available, drawdown funds, evergreen funds, and interval funds each serve distinct purposes. While evergreen and interval funds hold appeal for accredited investors due to liquidity and accessibility, drawdown funds remain the superior choice for qualified purchasers seeking targeted, long-term investment opportunities.

Drawdown Funds: Uniquely Suited for Sophisticated, Long-Term Investors

Drawdown funds, often associated with private credit, private equity, and venture capital, operate through capital commitments deployed over a specific period. This model requires investors to have not only significant capital reserves but also an in-depth understanding of the illiquid nature of such investments. For qualified purchasers—high-net-worth individuals or institutions with significant assets—these funds offer several advantages that are unmatched by other fund structures.

1. Strategic Flexibility and Superior Asset Allocation

Drawdown funds allow fund managers to strategically invest capital when compelling opportunities arise, fostering higher potential returns. This measured and disciplined approach aligns well with the long-term investment strategy of qualified purchasers, who typically seek exposure to high-growth sectors like private equity, venture capital, or real estate.

Interval and evergreen funds, on the other hand, are more rigid in their structure. Both funds necessitate continuous management of inflows and outflows by allowing periodic liquidity—a feature that’s attractive to accredited investors looking for semi-liquid access. While offering liquidity is a benefit, it does force fund managers to prioritize allocating a significant portion of the portfolio to liquid instruments and often restrains them from maximizing deployment into less liquid, high-return opportunities.

2. Aligned with Endowment-Style Investment Models

Endowments and large institutional investors, typically classified as qualified purchasers, have long chosen drawdown funds as their preferred investment vehicle. Why? Because drawdown funds mirror their long-term horizon and patient capital approach. Look no further than endowments tied to prominent universities like Harvard or Yale, which allocate significant portions of their portfolio to private equity and similar asset classes, predominately through drawdown funds.^1,2

Interval and evergreen funds, on the other hand, don’t provide the same degree of endowment-style exposure. Their semi-liquid structure and frequent subscription windows dilute the focus of a long-term investment objective. This makes them a useful entry point for accredited investors but far less practical for institutions or qualified purchasers seeking sustained and targeted growth.

Additionally, when considering the liquidity premium, long-term investors tend to command a significant advantage through drawdown funds. This premium reflects the additional returns that these investors expect as compensation for their illiquidity. In comparison, the relatively greater liquidity of interval funds may dilute this premium, making them less attractive for those focused on maximizing long-term, high-growth potential.

3. Purpose-Built for Illiquid Assets

The illiquid nature of drawdown funds aligns them closely with the unique needs of private markets. From leveraged buyouts to venture capital funding rounds, these assets require investors with both sophistication and patience. Qualified purchasers, equipped with deep pockets and financial expertise, are better able to weather the timeline of capital calls and delayed returns compared to accredited investors who may lack such resources or tolerance.

For accredited investors, evergreen and interval funds function as a practical alternative, offering controlled access to traditionally illiquid asset classes but with the "added benefit" of periodic liquidity. It is important to note, however, that there is an inherent mismatch between the illiquid nature of the private market asset class and an investor’s desire for liquidity. Certain semi-liquid vehicles permit withdrawals (share repurchases) of up to 2 percent of the fund's net asset value (NAV) each month, or ~5 percent each quarter.³ For an investor looking to redeem their position, it would take nearly 5 years to fully exit the position. These products democratize access to private market assets, but their structure inherently limits the fund manager’s ability to fully capitalize on long-term opportunities, reducing overall upside potential for high-caliber investors.

Why Evergreen and Interval Funds Fit Accredited Investors’ Needs

While drawdown funds provide unique advantages to qualified purchasers, evergreen and interval funds are better tailored to accredited investors seeking baseline exposure to private assets without entirely sacrificing liquidity.

1. Accessibility with Lower Commitment Thresholds

Evergreen and interval funds operate through an open-ended model with continuous inflows, offering accredited investors a way into private markets without requiring the massive capital commitments typical of drawdown funds. This makes them ideal for accredited investors with modest but growing portfolios. Certain interval funds allow accredited investors to access the fund with as little as a $2,500 minimum initial investment.³

2. Liquidity with Predictable Exit Opportunities

Interval funds, in particular, are often mandated to offer monthly or quarterly redemptions,⁴ making them more attractive for accredited investors who value periodic liquidity. For these investors, liquidity acts as a safety net, allowing them to mitigate risk while exploring opportunities in private markets—a balance they find appealing when compared to the illiquidity of drawdown funds.

3. Simplified Investment Management

Unlike drawdown funds, which require investors to manage periodic capital calls, evergreen and interval funds smooth out the process with rolling subscriptions.⁵ This simplicity makes them a more approachable option for accredited investors who may not have the time or expertise to manage the complexities of drawdown fund participation.

Choose the Right Fund for the Right Investor

The choice between drawdown funds, evergreen funds, and interval funds boils down to one factor—investor suitability. Qualified purchasers benefit from drawdown funds by leveraging strategic flexibility, enduring illiquidity, and accessing high-growth assets akin to institutional portfolios like endowments. Meanwhile, accredited investors gain access to private markets through evergreen and interval funds, which prioritize liquidity and approachability.

While interval funds and evergreen structures offer accessibility and private market exposure, it's crucial to understand the potential pitfalls associated with their semi-liquid nature. Although these funds often advertise regular liquidity windows, such as quarterly redemptions limited to a certain percentage, it's important to note that these windows may not always provide the desired level of liquidity. Investors may face challenges when trying to redeem their shares during market downturns or periods of heightened volatility.

Final Thoughts

Drawdown funds are best reserved for sophisticated qualified purchasers aiming to maximize returns in illiquid markets. Their ability to align with professional endowment strategies underscores their suitability for large investors with significant resources and strategic goals. Meanwhile, evergreen and interval funds continue to be invaluable tools to attract accredited investors seeking private market exposure with manageable commitment levels.

The right fund structure paired with the right investor isn’t just a match—it’s a strategy for growth. Choose wisely.

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Sources:

¹ Harvard University. (2024). FY24 Harvard Financial Report. Retrieved from https://finance.harvard.edu/files/fad/files/fy24_harvard_financial_report.pdf

² Yale University. (2024). FY24 Financial Report. Retrieved from https://your.yale.edu/sites/default/files/fy24-financial-report-10_25_24.pdf

³ Blackstone Real Estate Income Trust. (2024). Offering Terms. Retrieved from https://www.breit.com/offering-terms

⁴Salisbury, Ian. Barron’s. (Nov. 13, 2024). Interval Funds Are Hot. Do Investors Understand the Risks? https://www.barrons.com/articles/interval-funds-hot-understand-risks-2dd63895

⁵ Fasken. (Feb. 16, 2022). Interval Funds: A New Retail Investment Fund Structure. Retrieved from https://www.fasken.com/en/knowledge/2022/02/interval-funds-a-new-retail-investment-fund-structure